[Vanshika Sharma and Ayush Singhal are 4th year B.A., LL.B. (Hons.) students at NALSAR University of Law, Hyderabad]
The Insolvency and Bankruptcy Code, 2016 (“IBC”) was introduced with the primary objective of a time-bound resolution of corporate insolvency. However, since its inception, its operational mechanics have been challenged by an array of statutory overlaps. A notable overlap is the friction between the IBC’s moratorium and the dues claimed by statutory bodies like the Employees’ Provident Fund Organisation (“EPFO”).
One important issue is whether the initiation of a moratorium under section 14 of the IBC can halt or invalidate the assessment proceedings initiated by the EPFO. In a significant ruling by the Kochi Bench of the National Company Law Tribunal (“NCLT”), in the case of Regional Provident Fund Commissioner-II v. Furnace Fabrica (India) Ltd., the Tribunal has provided a comprehensive and nuanced answer. This landmark judgment reinforces existing precedents but also introduces new dimensions around EPF proceedings under section 7A of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (“EPF Act”). It discusses that the proceedings for determination of money due from employers, under the abovementioned section 7A, are quasi-judicial in nature, reinforces the principle of crystallisation of dues, and empowers the Resolution Professionals to challenge not only procedural but also the substantive validity of claims. The NCLT, in this judgment, also noted that the IBC mandates a time-bound resolution process, and any proceedings initiated or continued during the moratorium could have severe repercussions on the Corporate Insolvency Resolution Process (“CIRP”), undermining the IBC’s intent.
Background
Section 14 of the IBC imposes a moratorium upon the commencement of the CIRP, prohibiting inter alia, the institution or continuation of “suits or proceedings” against the corporate debtor. The interpretation of what constitutes a “proceeding” has been the central point of contention in a number of cases.
The EPFO, through its statutory powers, often initiates an inquiry under section 7A of the EPF Act to determine the amount of dues owed by an employer. Earlier judgments like S.V. Kondaskar, Official Liquidator, P. Mohanraj v. Shah Bros. Ispat (P) Ltd. and ABG Shipyard Liquidator v. Central Board of Indirect Taxes & Customs have allowed assessment proceedings to continue, arguing that they were merely administrative and not “legal proceedings.” However, this view has now been largely superseded.
The NCLAT in EPFO v. Jaykumar Pesumal Arlani emphasised that the term used in section 14(1) of the IBC was “proceedings” and the one used in section 33(5) was “legal proceeding”, implying that the bar under section 14(1) extended to assessment proceedings conducted by statutory authorities. It was reasoned that the intent behind the provision was to ensure that there was no depletion of the corporate debtor’s assets. In this case, the EPFO had passed assessment orders for PF dues after the resolution plan had already been approved by the Committee of Creditors. The NCLAT held that the CIRP is a time-bound process and the resolution plan, once approved, is binding on all stakeholders, including the EPFO. The Tribunal viewed the belated claim as an attempt to undermine the finality of the resolution process. While it did acknowledge that the assessment orders were passed during the moratorium, its decision focused on reinforcing statutory timelines and the finality of the resolution plan rather than exploring the legal nature of the EPFO’s proceedings. Hence, the judgment provided a procedural bar, stating that the EPFO had missed its window of opportunity to file a claim.
This approach, while effective in the specific case, left a lingering question: What if the EPFO initiates proceedings during the moratorium but prior to the approval of the resolution plan? The Jaykumar Pesumal Arlani judgment did not provide a comprehensive answer to this question, as its reasoning was heavily dependent only on the “belated claim” aspect.
A Novel Approach: Furnace Fabrica as a Substantive Solution
The NCLT Kochi Bench’s judgment in Furnace Fabrica adds a new dimension to the existing legal discourse. While it reached a conclusion similar to Jaykumar Pesumal that the EPFO’s post-CIRP actions were invalid, its reasoning is fundamentally different and more robust.
A Quasi-Judicial Proceeding, Not a Mere Assessment
The Tribunal explicitly held that the proceedings under section 7A of the EPF Act are quasi-judicial in nature, and not administrative, i.e., not merely an assessment, hence, they will fall under “proceedings” barred by section 14(1)(a) of the IBC. The Tribunal noted that section 7A(2) of the EPF Act bestows a statutory obligation upon the Regional Provident Fund Commissioner, while performing his duties under the said section, with the same powers as those of a civil court. This includes the authority to enforce the attendance of witnesses and parties, examine them under oath, compel the production of documents, and issue commissions for the examination of witnesses. Such powers, beyond administrative duties, are typically associated with judicial or quasi-judicial bodies. The Tribunal’s decision cites Kerala High Court’s decision in Central Board of Trustees v. Sastha Enterprises, which held that a section 7A determination cannot be based solely on inspection reports or assumptions but must be the result of a full-fledged inquiry where the employer is given a fair opportunity to respond and cross-examine evidence.
Therefore, based on the principle that any proceeding which involves “trappings of a court” falls within the ambit of the moratorium under section 14 of the IBC, such continuation or institution of legal proceedings against the corporate debtor is prohibited. This classification is crucial as it provides a clear legal basis for why the EPFO’s assessment proceedings cannot proceed during the CIRP, thereby upholding the time-bound nature of the IBC and giving more substantive and jurisprudential reasons for the claim’s non-admissibility during the moratorium period.
Crystallization of Dues and the Mandate for Finality
Furnace Fabrica also provides the required clarity on the basis of the principle of crystallisation of dues in insolvency proceedings. The Tribunal clarified that, under IBC, only those claims that exist and are finalised on the insolvency commencement date can be admitted by the Resolution Professional. Any fresh determination of liability during the CIRP, particularly through quasi-judicial proceedings under statutes such as the EPF Act, is barred by section 14 of the IBC. The Order mentions that “only claims existing as on the date of commencement of the Corporate Insolvency Resolution Process are admissible.” This ensures that liabilities are fixed as of the insolvency commencement date, preventing post-commencement proceedings from altering the debtor’s financial position and maintaining certainty for resolution planning.
In this case, the EPFO lodged a claim of ₹29.68 crore, primarily based on a section 7A report prepared after CIRP commencement. The NCLT held that such a claim could not be entertained, as it was both time-barred and founded onpost-moratorium assessments that lacked finality. Instead, only ₹1.46 crore, which was backed by pre-CIRP records, was admitted as crystallised dues. Hence, this judgment did not allow for contingent or hypothetical liabilities to be pressed post-commencement by relying on the principle of crystallisation of dues as a safeguard for the time-bound and predictable nature of the CIRP.
Challenging the Substance of the Claim
This judgment introduced another critical point, the ability of the Resolution Professional to challenge the substantive quantum of the claim. In this case, the NCLT accepted the Resolution Professional’s detailed, employee-wise recalculation of provident fund dues over the EPFO’s inflated figure, terming the latter “presumptive and inconsistent.” This empowers the Resolution Professional to act as a verifier of the substance of the claims, and not just a procedural gatekeeper.
This reasoning marks an important shift in insolvency jurisprudence by affirming the Resolution Professional’s authority to assess the substantive accuracy of claims, rather than merely policing procedural compliance. It empowers the Resolution Professional to act as a gatekeeper of the CIRP, ensuring that all claims, including those with super-priority, are accurate and substantiated.
The Way Forward
The NCLT has provided a clear justification for preventing post-commencement liabilities from undermining the CIRP by designating proceedings under section 7A of the EPF Act as quasi-judicial in nature and placing them within the scope of the moratorium imposed by section 14 of the IBC. This strategy strengthens the IBC’s fundamental goals of predictability, time-bound resolution, and finality by maintaining creditor trust and encouraging resolution applicants to invest capital without fear of last-minute claim escalation.
However, the judgment’s reliance on the “crystallisation of dues” as on the insolvency commencement date introduces a more complex dimension with respect to employee protection. Provident fund dues are frequently identified or quantified belatedly owing to the EPFO’s internal procedural timelines or an employer’s non-cooperation prior to insolvency, like in the case of Viprah Technologies Ltd v. The Regional Provident Fund. The absolute prohibition on section 7A inquiries during the CIRP could, therefore, preclude the recovery of legitimate employee entitlements where finalisation has not occurred before commencement. While the decision leaves intact the super-priority afforded to crystallised provident fund contributions under section 36(4) of the IBC, it constrains the procedural means of determining additional sums after the moratorium is triggered. This outcome reflects a statutory tension: the IBC prioritises procedural discipline and preservation of the debtor’s asset pool, whereas the EPF Act enshrines the safeguarding of workers’ social security contributions, even if enforcement is delayed. In Furnace Fabrica, the judicial balance clearly favours the former. While this shields resolution plans from destabilising late claims, it risks depriving employees of amounts genuinely due. Reconciling these objectives may require legislative or regulatory intervention, such as permitting provisional admission of EPFO claims on prima facie evidence or allowing quantification without recovery during the moratorium.
– Vanshika Sharma and Ayush Singhal